Markets climb the wall of worry

Summer has come early this year. And it’s not just the weather that’s unseasonal; the summer news slowdown has arrived well before the holidays too.

An absence of economic data and corporate news, plus no obvious resolution in the Gulf, has left investors holding onto the bullish AI narrative as the main driver of markets. The glass remains very much half full.

Last week was a ninth consecutive rise for global shares. That’s one of the best winning streaks in the post-war era. How long can it last?

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Putting it in perspective

With little to distract investors, now is not a bad time to step back and look at the current bull run in context. What’s driven prices higher, and what might trigger a reversal?

There are two bull markets running in parallel. The short-term cyclical bull is now 45 months old - that’s longer than the average 30-month bull, and so too is its scale, with prices having more than doubled since late 2022.

The second, long-term or secular bull market is also mature. It’s been going since 2009, putting it on a par with the previous two comparable periods, from the Second World War to the late 1960s, and from 1982 to the top of the dot.com bubble.

As usual, shares have risen on the back of a combination of rising earnings, dividends and higher valuations. Valuations are now high but not excessive. And earnings and dividends are growing fast. So, the cyclical bull may have something left in the tank.

The longer-term bull market also looks mature but not necessarily at the end of the line yet, although some red flags are starting to flutter. As well as earnings and valuations, shares have been driven in the long run by other tailwinds. Share buybacks and M&A activity have reduced the number of shares on offer to investors even as a dearth of flotations has limited the supply further.

The worry is that, with a handful of mammoth IPOs on the horizon and big capital expenditure needs making it harder for companies to buy in their shares, the supply-demand balance could look less favourable.

One of two things usually brings a bull market to an end. Excessive valuations, unsupported by fundamentals, ended the parties in 1929 and 2000. In 1968 it was inflation, rising interest rates and higher bond yields that took the punch bowl away.

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The week ahead

Which brings us neatly to this week’s main economic data announcement - non-farm payrolls in the US on Friday. Just ahead of the Fed’s first rate-setting meeting under new chair Kevin Warsh, investors will be watching the jobs data carefully for hints about where inflation and interest rates might be headed.

With the US jobs market looking like it has shrugged off the Iran war, another strong month of job creation looks probable - maybe 86,000 new positions after last month’s 115,000. A stronger than expected jobs print could cement expectations about a rate hike in America by the end of the year.

Inflation is also on the radar in Europe this week. Europe is particularly sensitive to rising energy prices and the headline rate of inflation is expected to rise further ahead of the ECB’s 2% target, perhaps to 3.3%. More worryingly, core inflation, excluding food and energy, is also forecast to rise, by 0.2 percentage points to 2.4%.

That means that a rate hike to 2.25%, the first in nearly three years, is a near certainty for June 11. Futures markets are pricing in a second hike before the end of the year.

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